[Federal Register Volume 61, Number 114 (Wednesday, June 12, 1996)]
[Notices]
[Pages 29774-29776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14811]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37280; File No. SR-Amex-96-19]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange, Inc., Relating to the
Elimination of Position and Exercise Limits for FLEX Equity Options
June 5, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 21, 1996, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule change
The Amex, pursuant to Rule 19b-4 of the Act, proposes to amend
Exchange
[[Page 29775]]
Rule 906G to eliminate position and exercise limits for FLEX Equity
Options.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Amex included statements
concerning the purpose of and basis for the proposed rule change, and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Amex has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In December 1995, the Exchange filed with the Commission a proposal
to expand its Flexible Exchange Option\3\ program to include FLEX
options on equity securities.\4\ That proposal sets forth position
limits for FLEX Equity Options at three times the position limits for
the corresponding Non-FLEX Equity Options. The Exchange now proposes to
eliminate position and exercise limits for FLEX Equity Options.
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\3\ In general, FLEX Equity Options provide investors with the
ability to customize basic option features, including size,
expiration date, exercise style, and exercise price.
\4\ See Securities Exchange Act Release No. 37053 (March 29,
1996), 61 FR 15537 (April 8, 1996) (File No. SR-Amex-95-57) (notice
of filing relating to the listing and trading of Flexible Exchange
Options on specified equity securities). The Commission notes that
the FLEX Equity Option filing is currently being reviewed.
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The Exchange believes that the elimination of such limits is
appropriate given the institutional nature of the market for FLEX
Equity Options. Currently, according to the Exchange, many large
investors find the use of exchange-traded options impractical because
of the constraints imposed by position limits. In the alternative, in
the absence of position limits, additional investors will be attracted
to exchange-traded options, thereby reducing transaction costs as well
as improving price efficiency for all exchange-traded option market
participants.
The Exchange also believes that FLEX Equity Options, unconstrained
by position limits, may become an important part of large investors'
investment strategies. For instance, in the absence of position limits,
investors will be able to use options to implement specific viewpoints
regarding the underlying common stock; viewpoints that take into
account specific near- and long-term expectations for the underlying
stock price and judgments on price volatility. Similarly, the ability
to execute large exchange-traded option transactions will permit large
investors to implement transactions that reflect the strength of their
interest in buying or selling the underlying shares, as well as their
concern or lack of concern for the timing of the sale.
The Exchange also anticipates that issuers of stocks underlying
FLEX Equity Options will use these options, primarily through the sale
of puts, as part of their stock repurchase programs.\5\ For example,
General Electric and Philip Morris each recently announced corporate
repurchase programs of approximately 100 million shares. Selling puts
to implement these programs would have required the use of one million
standardized option contracts, an amount far in excess of the position
limits currently available for options on these companies. Similarly,
the Amex attached to its proposal twenty-seven news stories of
companies whose stocks underlie Amex traded option contracts announcing
other corporate repurchase programs during 1995 and the first quarter
of 1996.\6\ In each instance, the announced size of the buyback
significantly exceeded the number of shares that could be repurchased
under the position limits currently imposed on FLEX Equity Options.
While the Exchange does not expect that corporate issuers will use the
sale of put options to buy all the securities that are covered by their
repurchase programs, FLEX Equity Options without position limits will
at least provide issuers with a meaningful alternative. The inability
of corporations to use the sale of exchange-traded equity put options
on a significant scale relegates this activity to less transparent
markets.
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\5\ The Commission notes that issuers would, of course, need to
comply with all applicable provisions of the federal securities laws
in conducting their share repurchase programs.
\6\ The Commission notes that the new stories are available for
examination at the Amex or at the Commission, as specified in Item
IV below.
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The Exchange believes that making the Exchange-traded options
market more accessible to large investors will create more ``complete''
markets and thereby better serve investors and issuers. In addition,
the Exchange believes that institutional investors, large individual
investors, and corporate issuers repurchasing their own shares will
find FLEX Equity Options without position limits extremely attractive.
Moreover, this activity will occur in the regulated, transparent
domestic FLEX Equity Option markets rather than in offshore markets
which do not come under Commission oversight.
Pursuant to Section 13(d) of the Act and the rules and regulations
thereunder, the inclusion of any option position is required when
reporting the beneficial ownership of more than 5% of any equity
security.\7\ The integration of options and reporting requirements in
the underlying security pursuant to Section 13(d) makes large option
positions widely known and easily monitored by regulators and other
market participants. In this light, FLEX Equity Options trading will
have the transparency of any exchange-traded option transaction or
position (open interest) plus the call market focus of liquidity
inherent in the Request For Quote (``REQ'') process. Similar to non-
FLEX options, positions in FLEX options are required to be reported to
the Exchange when an account establishes an aggregate same-side of the
market position of 200 or more FLEX option contracts. The Exchange's
proposal is based on the belief that manipulation is best controlled
through active and transparent markets.
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\7\ Pursuant to Rule 13d-3 under the Act, a person will be
deemed to be the beneficial owner of a security if that person has
the right to acquire beneficial ownership of such security within
sixty days, including the right to acquire through the exercise of
any option.
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The Exchange recognizes the theoretical opportunity for a would-be
manipulator to initiate a large FLEX Equity Option RFQ with no
intention of actually trading. Such tactics, however, would be patently
obvious to Exchange compliance officials as well as to the Commission.
Moreover, trading against a bogus FLEX Equity Option RFQ seems readily
actionable under existing laws and regulations.
2. Statutory Basis
The Amex believes that the proposed rule change is consistent with
Section 6(b) of the Act in general, and with Section 6(b)(5) in
particular,\8\ in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and is not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\8\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex does not believe that the proposed rule change will impose
any inappropriate burden on competition.
[[Page 29776]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the Amex consents, the Commission will:
A. by order approve the proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing also will be available
for inspection and copying at the principal office of the Amex. All
submissions should refer to File No. SR-Amex-96-19 and should be
submitted by July 3, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-14811 Filed 6-11-96; 8:45 am]
BILLING CODE 8010-01-M
